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What you can expect now that crafts retailer Michaels is a private company

CEO Ashley Buchanan says he can make changes faster outside the purview of Wall Street. And other retailers are considering going private, including Plano-based At Home, which has a shareholder vote Wednesday.

Crafts retailer Michaels says it has more work to do after it pulled off a strong year during the chaotic pandemic.

The health crisis forced retailers to snap into a new environment, which for Michaels meant that all 1,252 stores turned into digital fulfillment centers and that online sales went from less than 4% of its total to 12%. And the years ahead are going to be just as demanding.

How fast the largest U.S. arts and crafts retailer can adapt and grow has something to do with who owns the company, Michaels CEO Ashley Buchanan said.

“It’s easier to transform more quickly as a private company,” Buchanan, 47, said in an interview last week.

Michaels transitioned from a publicly traded company to a private one in April. It was acquired in a $3.3 billion leveraged buyout by Apollo Global Management in a transaction that valued the retailer at $5 billion.

Swapping the scrutiny of Wall Street and the pressures of a daily stock price for a pile of debt is something many retailers have faced and will face. Many have entered into leveraged buyouts with private equity owners in recent years, with mixed results. Michaels did it once before. It was taken private in 2006 in a $6 billion leveraged buyout, went public in 2014 and regularly paid down debt.

Apollo said it put in $1.4 billion of the $3.3 billion needed to buy shares from the public and refinanced Michaels’ existing debt of $2.54 billion. That resulted in Michaels’ total debt rising to more than $4 billion. The retailer also has a $1 billion credit line and entered the transaction with $275 million in cash, Apollo said. On its last public balance sheet, Michaels listed cash of $1.2 billion as of Jan. 31.

Buchanan said the debt is manageable and noted that the retailer has operated with more debt in the past. “We’re comfortable with it,” he said. “We can service our debt and spend money” to continue driving the business.

At Michaels, growth has been intermittent for years, with spikes now and then from new craft trends and crazes such as adult coloring books and rubber band bracelet kits. But recently, sales have been flat.

The pandemic actually gave the chain a boost as America’s stay-at-home economy resurrected hobbies and crafts as entertainment or a way to make a living. Sales last year increased to $5.2 billion, up 3.9% after declining in 2019, and matched 2018 total sales.

Logos from some of the private brands owned by Michaels are on display at the company's new headquarters in Irving.
Logos from some of the private brands owned by Michaels are on display at the company's new headquarters in Irving. (Ben Torres / Special Contributor)

Buchanan has plans to continue the momentum of the past year. The native Texan, born in Mount Pleasant and a graduate of Baylor University, took over as Michaels CEO just before the pandemic hit. He was recruited from Walmart, where he spent 12 years, most recently as chief merchandising and operating officer for Walmart U.S. e-commerce.

His initial assessment of Michaels’ problems was that they were self-inflicted, with poorly organized stores, product mixes that needed updating and store locations that hadn’t kept up with regional growth.

“Customers tell us they love us but ‘you-all make it hard to love you,’” Buchanan said. His three school-age daughters, who he said prefer the arts to sports, are a live-in focus group. Their critiques included that the stores carried too many shades of blue glitter at the expense of other colors and complaints about clumping water color paints. Both have been fixed. Product quality and quantity are a big focus of his.

Michaels has what he calls “a scalable version” of a new store format in Plano that’s better organized and turns the store into more of an experience. Even adding tables where customers can play around with materials helps shoppers, he said. Classes and demonstrations are coming back, and the goal is to better merge Michaels’ digital and physical experiences, he said.

At the same time, Buchanan moved the company into bulk products that are targeted toward professional customers who make gifts and decor items for a living. Stores can be little warehouses for small businesses, and that’s given the chain a new “real estate paradigm.”

“Having 1,200 stores acting as distribution centers can operate more cheaply than a warehouse several miles away,” he said.

Michaels is moving its headquarters from its longtime Bent Branch Drive location into a 123,740-square-foot, three-story building near DFW International Airport. The Royal Ridge III building on Carpenter Freeway is near Esters Boulevard.
Michaels is moving its headquarters from its longtime Bent Branch Drive location into a 123,740-square-foot, three-story building near DFW International Airport. The Royal Ridge III building on Carpenter Freeway is near Esters Boulevard.(Ben Torres / Special Contributor)

Buchanan says he’s starting out with an edge over the competition, which he sizes up as mostly third-party sellers on Amazon and an aisle or two at Walmart and Target.

He doesn’t see a big threat from those big retailers because they won’t devote valuable shelf space to a category of products that moves slowly. They’re after merchandise that sells out 12 or 14 times a year, Buchanan said.

The product overlap with more sewing-focused Joann stores, which just went public, is about 40%. That leaves Oklahoma City-based Hobby Lobby, which doesn’t reveal annual sales but is Michaels’ biggest competitor with 930 stores in 47 states. Joann operates 870 stores in 49 states and had sales last year of $2.84 billion.

Buchanan said he plans to step up store relocations, saying the company hasn’t always kept up with local market demographic changes. Last year, Michaels permanently closed 25 stores and relocated 11 stores.

“I don’t think we’ve shifted stores to new locations as well as we could,” he said.

Evan Mann, retail analyst at GimmeCredit, said Michaels will have more flexibility as a private company to expand and improve its stores and digital platform without quarterly reporting concerns, and he thinks the chain could benefit from Apollo’s retail experience.

“But we also wonder how much of Michaels’ recent turnaround in sales and profitability was related to a spike in demand from consumers stuck at home due to COVID-19 and will subside as the economy continues to open up and other forms of consumer entertainment and spending become available again,” Mann wrote in a report.

Moody’s gave Michaels a stable outlook as a credit risk over the next 12 to 18 months as consumer spending will begin to normalize. Moody’s says Michaels has a strong position in its market and a history of successfully managing high leverage and repaying debt. But private equity ownership could also result in more aggressive financial strategies, Moody’s says.

Michaels is in the process of moving into a new headquarters in Irving. A three-story building has been remodeled and decorated with framed artwork made from materials that can be purchased at Michaels.

“The new office is filled with constant reminders about the passionate work done by customers,” he said. “It represents where we want to take the brand.”

Twitter: @MariaHalkias

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Maria Halkias, Staff writer. Maria Halkias has covered the retail scene for The Dallas Morning News since 1993.

mhalkias@dallasnews.com /maria.halkias @MariaHalkias mariahalkias LinkedIn Iconhttps://www.linkedin.com/in/MariaHalkias
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